In a landmark transaction for Kenya, DEG structured and arranged the complete debt financing of US$105mn for geothermal power plant Olkaria III.

The 48 mega-watt (MW) plant is located in Naivasha, Kenya, and is expected to inch the country closer to reducing the energy gap.

DEG was not only the agent for the entire debt financing, but also joined with KfW Development Bank to provide the owner and
operator, Orpower 4, with a long-term loan of US$40mn.

A number of financing institutions contributed funds to the debt financing. Additional lenders include European Finance Partners (EFP), a financing vehicle of 13 European development finance institutions (EDFIs), and the European Investment Bank (EIB), Emerging Africa Infrastructure Fund (EAIF), as well as France’s Proparco and FMO (Netherlands).

“The cooperation between the lending participants is worth mentioning, because the transaction was financed solely by DFIs and not commercial banks,” says Claudia Boeing of DEG’s portfolio management division. She maintains though that it is not DEG’s aim to build up competition with existing local commercial banks. “We only go into financing where we think there is a gap, and where we think this would add to the development of the country, to climate change policies, and so on.”

Boeing adds that moving into the commercial banks’ agency structures is relatively new to DFIs, who generally only cooperate in a more parallel manner, by each providing their own loan and not working in a syndicated/structured manner.

The deal boosts DEG’s efforts to support projects that have a positive impact on the environment, and which encourage the reduction of carbon emissions. Kenya is one of DEG’s focus countries, and with this project, the German development cooperation supports the utilisation of renewable energy.

Geothermal energy remains Kenya’s most effective resource for competitive electricity production. It is expected that such projects will ensure the availability of a firm source of power and energy within the country to meet the growth in demand and stabilise the national grid.

Geothermal projects avoid the need to import fossil fuels and instead utilise a locally available resource – namely steam and/or hot water – to enable power generation.

The project contributes very positively to the targets of international climate change policies with the generation of renewable energy and is expected to qualify for the provision of carbon credits within the Clean Development Mechanism of the Kyoto-Protocol.

According to plans of the World Bank, independent power producers (IPPs) are intended to take over a major part of power generation in Kenya.

Olkaria III is the only privately owned geothermal IPP in Africa and therefore takes a pioneering role in the utilisation of renewable energy and the development of power projects in Africa.

Phase I of the Olkaria III power plant had an output of 13 MW. Phase II, the refinancing of which was supported by DEG, increased the plant’s capacity to 48 MW.
Deal information

Borrower: Orpower 4
Amount: US$105mn
Mandated lead arranger: DEG
Additional lending participants: KfW Development Bank, European Finance Partners, European Investment Bank, Emerging Africa Infrastructure Fund, Proparco, FMO
Date closed: February 2009